Amid the more obvious Covid-19 crisis impacts, authorised guarantee agreement liabilities have caught some key players unawares, and are now making many tenants and landlords assess how they put security packages in place.
The saga so far
AGAs are a statutory invention, created by the Landlord and Tenant (Covenants) Act 1995 to make up for the fact that the law was changing.
From 1 January 1996, it was no longer the case that the first tenant of a lease would remain liable for covenant performance throughout its whole term, regardless of who actually owned the leasehold (a situation known as “privity of contract”, whereby the relationship between landlord and that first tenant was sacrosanct – this led to a chain of indemnities being lengthened every time a tenant passed the lease interest on to a new assignee). Instead, the principle of tenant release was now enshrined. Outgoing tenants could technically expect to be off the hook for the performance of lease covenants, such as the payment of rent or repairing the property, moving forward.
For landlords, this situation was concerning. Responsible landlords who did their due diligence on the covenant strength of that first contracting tenant could find themselves with little say in the outfit currently entitled to quiet enjoyment of its building. So, the AGA was born, answering the need for a new way of balancing the liability of an outgoing tenant and the protection of the landlord. With the principle of release on assignment, this simple AGA enables an outgoing tenant to provide a guarantee of the performance of its direct assignee. This is applicable from the point at which its interest is signed over until, usually, whichever comes first out of the date that new tenant also moves on or when the lease officially ends.
AGAs were not intended to be routinely entered into on lease assignments. The 1995 Act provided for agreement on giving them to be written into the terms of each lease, but this often comes down to the negotiating strength of the parties. The Code for Leasing Business Premises in England and Wales 2007 recommended only asking for an AGA at the date of assignment if the assignee is registered overseas or of a lower financial standing. Where smaller corporate tenants were involved, it suggested avoiding AGAs altogether, and seeking a rental deposit from the incoming tenant instead.
The latest incarnation of this Code, as a professional statement in February 2020, suggests the provision of an AGA only where it is reasonably required by the landlord. The fact remains, however, that they are still ubiquitous. However, given the impact of the coronavirus pandemic, landlords and tenants are now thinking harder about how, and when, they agree to give or rely on them.
Resurrecting old liabilities
Without a firm handle on AGA deadlines, many tenants are simply guilty of forgetting or assuming that liability under previous lettings has long ended. But the pandemic, and resulting crisis hitting the retail and hospitality sectors, is resurrecting old liabilities. We have all seen high-profile sinkings in recent months, and the parties who assigned to those corporates with AGAs, often many years ago, are facing considerable demands for rent in their wake.
When the existing tenant files for bankruptcy, the previous tenant may be obliged under an AGA to take a new lease of the relevant premises. It’s worth ensuring now that old liabilities are taken seriously, properly documented and accounted for. Moving forward, well-advised tenants are likely to be looking to rely more heavily on the recommendations of reasonableness in the Code. They could agree with a landlord that any AGA is more strictly time-limited, or dispensed with altogether. They could also prefer strategically to surrender or sublet to avoid the situation.
House of cards
From a landlord perspective, AGAs can solve a perennial problem of shifting counterparty covenant strength, but security gaps around lease guarantees still exist, and these are perhaps most clearly evident when tenants assign leases to group companies. There are likely to be valid operational reasons for tenant landholdings to move inter-company, but it’s easy to see how quickly the covenant strength of a parent plc can be lost. Thanks to the strict anti-avoidance provisions in the 1995 Act, it only takes one more inter-group assignment to release a parent company balance sheet from all lease liability.
Landlords can also be caught out by the strict timelines on enforcement of AGA liability. The consequences for tenants failing to adhere to AGA terms could be fines, but the problem for landlords is the six-month deadline to impose the liability in the first place. Given the current uncertainty of the summer, and top-down messaging around working with commercial tenants to try and salvage viable businesses, opportunities to enforce legalistic and often years-old security could easily be lost.
Changing rooms
Tenants and landlords are starting to question the business value of providing an AGA, or even taking one. Security packages for lease assignments can be structured differently – for example, with easy-access rental deposits. But picking up on the common theme of symbiotic lease parties converging on a closer operational relationship, some landlords are already rolling up their sleeves to better support tenants in sectors such as retail and leisure to limit voids. Rather than relying on AGAs to plug an income gap in the short term, these landlords are hoping that shouldering some of the shifting covenant risk might actually bring more reward in the longer term.
Emma Oakley and Lauren Fendick are partners and Clare Harman Clark is a senior professional support lawyer at Taylor Wessing
